Carbon has best quarter in six years amid EU permit-supply curbs

Mathew Carr

European Union carbon permits had the biggest quarterly gain in six years as lawmakers consider permanent measures to curb a surplus that helped push prices to a record low.

December allowances climbed 25 per cent since March 31, the most for a quarter since June 2008, according to data from the ICE Futures Europe exchange at 4:57 p.m. in London. The benchmark contract on ICE, the biggest exchange for EU emissions trading, is down about 80 per cent from a peak six years ago.

EU lawmakers are negotiating reforms to the bloc's cap-and- trade emissions program, the world's biggest, that include the creation of a permit reserve to control supply and help lift prices to levels that discourage burning of fossil fuels. The proposals follow three years of debate for a plan that started in March to withhold some allowances and return, or backload, them to the market at the end of the decade.

A start of the reserve before the 2021 proposed in January by the European Commission is a probable outcome because it is backed by nations including Germany and Italy, said James Cooper, an analyst in London for Bloomberg New Energy Finance. An early start is "likely to be among the strongest elements that could drive EU allowance prices in late 2014," he said today in an e-mailed research note.

December carbon futures rose 1 per cent to 5.87 euros ($8.53) a metric ton on ICE. It earlier reached 5.96 euros, the highest since March 26. The contract fell to a record 2.46 euros in April last year.

ICE handled 1.45 billion tons of carbon contracts for the quarter through June 27, compared with 1.93 billion tons in the same period last year. Volume reached a record 2.4 billion tons in the first three months of this year.

'Torturous negotiations'

"The torturous negotiations on backloading have paved the way for these reforms to progress more smoothly than we might think," Mark Lewis, an energy and climate analyst at Kepler Cheuvreux SA, the Paris-based broker and investment bank, said by phone. "The backloading has had a direct effect" on prices this quarter, he said June 27.

Under the EU's emissions market, permits allowing the holder to emit one ton of carbon dioxide are allocated for free or auctioned to about 12,000 factories and utilities that must have enough to account for their discharges or pay fines. Prices plunged from almost 30 euros a ton in 2008 as the financial crisis damped industrial demand for pollution permits.

In the temporary supply fix started in March, Europe will withdraw 900 million permits from the market through 2016 and return them in 2019 and 2020. That's equivalent to almost half of the bloc's annual supply.

2030 policy

The market-stability reserve proposed in January is part of a climate and energy strategy for 2030 under which the commission also wants to deepen EU emissions cuts to 40 per cent from 1990 levels. The current target is for a 20 per cent reduction by 2020.

The supply of permits will be reduced if there's an accumulated surplus of at least 833 million tons in the carbon market, according to the draft law. If the surplus falls below 400 million tons, the EU would begin returning allowances via almost-daily auctions from the reserve.

Backloading seeks to create scarcity in the market starting this year. The portion of winning bidders in auctions of permits that were also emitters rose to a record 68 per cent in April, compared with 58 per cent in March and 40 per cent in April last year, according to data published last week by the commission.

United Nations Certified Emission Reductions for December rose 14 per cent to 16 euro cents a ton today, paring the quarterly loss to 5.9 per cent on ICE. Factories, power stations and airlines in the EU carbon market can use CERs for a portion of their compliance needs.

The quarterly CER volume of 40 million tons on ICE is the lowest since the first three months of 2008.